Last week, markets barely moved. The Dow Jones Industrial Average added 7 points or 0.04% while the S&P 500 jumped 8 points or 0.38%. The Nasdaq Composite Index gained 0.83% to close at 5257.40 on the back of big gains at Netflix.
Markets appear to be in a holding pattern until November 8. Having survived all three presidential food fights, they are now pricing in a Clinton victory, a possible slim Democratic majority in the Senate and a slimmer Republican majority in the House. The real question is how much Mrs. Clinton, if she does indeed prevail, will be plagued even before she enters the Oval Office by investigations of her emails, the Clinton Foundation, her conduct as Secretary of State, and her repeated lies to investigators and the American people.
In other words, the odds of her entering office with any kind of mandate are somewhere between slim and none – which means we can look forward to, at best, four more years of gridlock.
Regardless of how hard the Republicans come at her, she will face significant resistance in Congress to her plans to raise taxes, increase entitlement spending and move the country further to the left. The most likely scenario is further gridlock as the country moves closer to another recession and perhaps a financial crisis.
But I do see one tiny reason for market optimism…
Simpson-Bowles Is A Small Beacon In a Very Dark Outlook
One potential reason for optimism is that Mrs. Clinton is on record as supporting the Simpson-Bowles Commission’s proposals to attack the federal deficit. We are here assuming she was telling the truth and wasn’t merely pandering to win votes when she made that statement (a large assumption since many oxen will be gored by the Simpson-Bowles plan). Barack Obama’s failure to support this plan, which he called for, was one of many signal failures of a presidency that has left America and the world in far more fragile shape than when he entered office. If Mrs. Clinton was serious about her support for Simpson-Bowles and can summon bipartisan support for it, we may see better days ahead.
But that ray of light is very small.
While the country barreled closer to the election last week, markets listened to more idiocy from Janet Yellen and her band of intellectual and moral dwarfs at the Federal Reserve. The latest gem from the Fed Chair was some meaningless mumbo-jumbo about running a “high pressure economy,” which in Fed-speak means an economy in which inflation runs above the Fed’s 2% target in order to stimulate economic growth. Not only does this ignore the fact that real-world inflation (not the phony inflation calculated by the government and apparently swallowed whole by economists) is raging but the overwhelming evidence that the Fed’s approach of stimulating growth by keeping interest rates low doesn’t work.
Whether she is acting by design or sheer ignorance, Janet Yellen is helping destroy the American economy and helping to enshrine centralized government control over every aspect of American life. What the Fed does is complex yet extraordinarily far-reaching. It is far easier to understand what other parts of the government do like the Supreme Court, which deals with issues like gun control, free speech and abortion that are easily understandable by the average American. But very few of citizens understand our fractional reserve banking system (including virtually no members of Congress). By controlling the price and supply of money, the activist Federal Reserve is a key component in the progressive political ideology that has expanded the control of government over every aspect of American life. It may seem that what the Fed does is unconnected from ObamaCare, an activist Supreme Court, out-of-control agencies such as the EPA and NLRB, Dodd-Frank and the rest of the governmental assault on liberty, but it only seems that way. In reality, these are all different fronts in the war being waged on Americans’ freedom by their own government.
Of course the Fed is petrified about the effects of higher interest rates on an economy that features record levels of public and private sector debt. But keeping interest rates low isn’t going to stimulate growth, which is what is needed to deal with the debt. Instead, low interest rates are suppressing economic activity by leading economic actors of all types to act more cautiously. Coupled with a tax code that rewards speculation and unproductive and short-term behavior, the United States suffers from a toxic policy regime. Add to that an investment world that also focuses on short-term results and fails to understand risk-adjusted returns and we can see why we are on such a dangerous course.
And needless to say, little that we have heard during the presidential election suggests that meaningful change lies ahead (Simpson-Bowles excepted).
A Note On Some Of Our Favorite Toxic Stocks
At the end of the week, it appeared that AT&T Inc. (NYSE: T) was about to buy Time Warner Inc (NYSE: TWX) in a deal worth more than $80 billion, another sign of the grotesque industry consolidations that occurred under the unwatchful eye of the Obama Justice Department. The next administration will get to cut its antitrust teeth on this deal, which is already attracting a lot of political opposition.
Elon Musk is busy scrambling to con investors to vote in favor of the Tesla/Solar City merger. In the meantime, Tesla Motors Inc (NASDAQ: TSLA) disclosed that plans for production of its lower cost car are slipping and won’t meet Mr. Musk’s earlier forecasts (surprise, surprise). Solar City is bankrupt and Tesla is an accident waiting to happen whether or not the merger goes through.
Another one of my least favorite stocks, Valeant Pharmaceuticals Intl Inc (NYSE: VRX) keeps dropping and is now back below $22 per share. Among other things, this drop keeps battering the performance of Bill Ackman’s hedge fund and his publicly traded entity Pershing Square Holdings Ltd (AMS: PSH) which is down from over $20 per share at the beginning of the year to well under $14 today. Interestingly enough, PSH is now trading at a sharp discount to its NAV of $16.31, suggesting that investors are wearying of the media-hungry Mr. Ackman’s act. More likely they are getting tired of his pathetic performance; he is down around 20% for two years in a row while only letting investors in his hedge fund withdraw 1/8 of their money each quarter. He is now managing $11.4 billion compared to $20 billion at his peak. Sadly, most of that decline is losses (including nearly $3 billion on VRX alone). Anyone who thinks Mr. Ackman is still worth a shot can buy PSH and retain the ability to sell the stock without being subject to the lock-up trapping the so-called smart money investors in his hedge fund. Maybe Mr. Bill still has a few more tricks up his sleeve; a 20% discount to NAV is pretty tempting…